No charts on this one. None needed. Everyone who has continually tried to pick the top of this bull has been taught a painful lesson so far. I'll say this again. The only way that I know of to realistically have any chance of spotting a market top is by watching what the big money in the market is doing. Right now the big money is buying heavily. As long as the COT is long I will have to assume that any corrections are buying opportunities. Since commodities are where the real bull market is that means I want to continue to hold my positions in precious metals since they are due to outperform other commodities with the possible exception of agriculture which has also underperformed.
I think it's time to take a look at the point and figure charts. Triple top breakout on SLV price objective of $190. Quadruple top breakout on GLD price target of $85. Finally a triple top breakout on the XAU with a price objective of $274. So far things are looking good in the PM world.
I'm going to talk a little bit about inflation today but I'm going to come at it from a little different angle and try and show you how it affects everyone personally and why you should keep inflation in mind when you make investing decisions.
I'm going to use gasoline as an example because it's the most widely used form of energy but the principles can be applied to anything from food, tuition, housing, health care, you name it.
In 2000 right as the stock market was topping out gasoline would cost you roughly 75 cents to a dollar a gallon. So if you were to cash out one share of the Dow you could purchase 11,750 gallons of gasoline at that time give or take depending on the actual price of gas.
The Dow has been in a strong bull market right? We've been making new highs right? Stocks are a protection against inflation right? WRONG
As of yesterday gasoline was selling for $2.28 per gallon and the Dow was valued at $13,800. Well gosh darn it the Dow that has supposedly been in such an exceptional bull market now only buys 6,052 gallons of gasoline. Don't even get me started on how well the Nasdaq has done during this same period. Now if you were or are in bonds during this time you are getting eaten alive by inflation. Investors tend to view bonds as guaranteed but that only works if the government behind those bonds isn't destroying it's currency. (Ours is by the way)
During times like these investors must be invested in "REAL STUFF". Gold, silver, oil, wheat, soybeans, copper, you get the point. The government can print as many dollars as they want for free but they can't print a barrel of oil or an oz. of gold or a field of wheat.
I know many of you are familiar with my 5th year correction scenario. For any who are new to the site. All that means is that typically secular bull markets will have a serious counter trend decline somewhere around the 5th year of the bull market. The 87 crash is a great example. Last summer I think we saw that decline in the commodity markets. During the first phase energy and base metals outperformed precious metals and agriculture. During the second phase I fully expect PM and Ag to outperform. Notice how the correction in PM during this time was also milder than what took place in energy. During this next phase I think PM and ag is where an investor will outperform. These second phases can be rather long. The second phase in the stock market lasted from 87 to 98. During this time corrections should be bought not feared. Remember a correction is just the market doing something stupid. Your job is to take advantage of this stupidity.
Tonight I'm going to post a clip from today's daily update.
"Now I’m going to tell you the three ways to get rich in the stock market. The first and most dependable is compounding. Start early in life, buy good companies that throw off cash flow as dividends, reinvest those dividends and in 30-40 years you will be rich.
Second: Find a superior system that consistently makes money and then stick with it thru thick and thin. Every system will have losing trades. Every system will have losing years. If you can stick with your system for 30-40 years you will end up rich. If you had invested $10,000 in the COT system in 1986 and used leverage as described above you would now be worth somewhere around 5-10 million dollars.
Third: Spot a secular trend as it begins, get on and hold on till it’s done. The third is how billionaires are made. If you had spotted the bottom of the bear market in 74 and just bought and held on till 2000 you would probably be worth many, many millions at that time. Do any of you happen to recall who was buying in 74? That’s right Warren Buffett. We have that very same opportunity right now or I should say we had. Commodities have entered into a secular bull market. Most will gain 1000-2000% before this bull is over some like silver may move 4,000 or more %. To realize this incredible potential you have to be willing to hold on. There are going to be countless investors who are going to jump ship especially in this second phase. The media will broadcast repeatedly that this is a bubble. The naysayers will be many. If you can ignore all this crap and just keep holding you will be rewarded, big time. We will know when the end is approaching because everyone you know will be investing in commodities. Everyone at work, at the gym and the guy filling up his car next to you will be bragging about his gold or silver or XOM stock. When you see this start to happen then you’ve got about a year to a year and a half before it’s all over. BTW at that time nobody will think it’s a bubble anymore. They will give you countless reasons why oil prices will rise into the foreseeable future even though we’ll see drilling rigs off both the FL and CA coast. Gold and silver mines will be sprouting up daily. We’ll be prepared though and we’ll know when to jump ship and move on to the next bull market. By that time you should have made your fortune. See you at the top!"
I pointed out the runaway move in the S&P last year. These kind of moves are characterized by very uniform and minor corrections. It's beginning to look like the PM could be entering into a runaway type move. So far the corrections in gold have held at roughly $25 and in Platinum at $35-$40. If this trend continues then we should look for a correction that exceeds these parameters as a hint that the run is over. The two strong metals will most likely pull the weaker two (Silver & Palladium) higher with them. Both are too cheap and I expect liquidity to begin flowing into both.
I suppose many investors assume that the rise in commodity prices is a monetary phenomenon. However looking at gold and oil in Euros, Pounds and Yen we see they are both in strong bull markets even when measured in currencies that are appreciating strongly. The US is exacerbating the problem by printing too many dollars but the underlying cause is a supply/demand imbalance.
I'm going to point out again what I think will ultimately bring about a recession and it's not the housing melt down. I've posted in the past here and here about what I think the cause of recessions is. It is a spike in energy prices. As long as energy climbs in a controlled manner economies can adapt and survive higher energy prices. It's when they spike quickly that problems start to happen. If all of a sudden it costs two or three times as much to fill your car, heat your home or ship your products then bad things normally follow. Unless you have a really nice boss or can easily pass on the increase in energy costs to your customers then you are going to have to make some drastic changes in your life style during an energy spike. We all know how likely it is for your employer to boost your pay by 20% especially if he's feeling the pinch from the energy spike himself. Needless to say the extra money that was used for discretionary spending probably suffers during an energy shock. Since personal consumption is 70% of the economy it's not a good thing when a big chunk of this gets diverted to energy. Less consumption means less profits for business. Shrinking profits mean layoffs. Layoffs mean even less consumption. A vicious circle ensues. Notice the chart above. You will see a large spike in 79-80. Two recessions followed. Another spike during the first gulf war causing an immediate recession. Another spike in 99-2000. The bursting of the tech bubble and another recession followed. We are nearing the level at which things can get dicey. If we cross the $100 level this winter and especially if oil holds at this level I would say there's a very good chance we could see a recession sometime next year.
I think it must be human nature to love the underdog. It seems that it is often human nature to want to invest in the underdog. By that I mean play the low percentage bet or buck the odds. Now if you are in a casino you will get rewarded if the long shot hits with a sizable return on your original bet (not sizable enough for you to make money over the long haul though. Hey they don't build those casinos by letting gamblers win.) Let's take roulette for instance. If you put $5 on 13 and it hits you will be paid 35:1 or $175. Unfortunately there are 38 spots on the wheel so over the long haul you will slowly lose money. Now lets take a look at what's involved when you choose to fight the odds investing. I showed subscribers today that the odds were roughly 4:1 that the rest of the week should be positive. Now if you were in the casino you could expect to get paid at least 3:1 if the long shot hit. That's not the case here. If you do beat the odds and the market goes down there's no guarantee it's going to drop 3 times as much as it would go up. Actually the odds in this situation are skewed the other way. Historically the return has been 3 times higher than the drawdown on options expiration week by going long Wed. thru Fri. Either way the market is rarely going to reward you for playing the long shot. The market is only interested in taking away your money as fast and as unfairly as possible. Fortunately you have the option to be the casino and keep the odds in your favor at all times. Unfortunately because we love the underdog or because the market makes the underdog look so appealing it's quite often hard to make ourselves take the correct trade.
I'm posting the weekly charts of GLD and the XAU. Notice the only other time that GLD shot up like it did recently was during the final leg of the first phase in golds secular bull market. Now take a look at the XAU. It has never gone up like that. Some are suggesting that we are witnessing the final blowoff in this bull market. I guess it's possible. Anything is possible. However I'm going to point out another possibility. Perhaps something very significant in the investing environment recently changed. Gold is simply responding to that change. The Fed has decided to sacrifice the dollar in exchange for stimulating the economy. Gold is simply responding to the obvious that the Fed is now embarking on a rate cutting cycle. Will they cut at the next meeting? I don't know. The Fed funds futures say the probabilities are low for that in Oct. but who knows about the rest of the year. I don't see gold reversing this uptrend to any great extent until the Fed starts tightening again and I doubt that will happen at least till after next years elections.
I'm going to point out a failed Sperandeo 1-2-3 reversal. I guess you could call this one a 1-2 continuation :) The test of the highs proved unsuccessful and so the trendline has now changed to a slightly lower angle and the trend has continued up instead of reversing. We now look like the HUI is on it's way to a technical rule #1 advance (A move followed by a sideways range often precedes another move of almost equal extent in the same direction as the original move. Generally, when the second move from the sideways range has run its course, a counter move approaching the sideways range may be expected).
I'm going to let you in on a secret. There are always going to be doubters in any secular bull market. As bull markets progress the Beanies of the world will come out of the woodwork and tell you with great confidence that this is a bubble and the end is near. Some can even make a pretty convincing argument. I suggest when you start to buy into this nonsense you proceed to the beat your head against the wall technique. Remember no one can see into the future. You don't make money in bull markets by getting shaken off the bull after a couple of points. You make money by holding on. Just because the market is overbought is no reason to exit. Bull markets get overbought and they stay overbought for long periods of time. They make new highs. That's what bull markets do, they go UP.
Archived daily updates are now available. See instructions under "requesting the spreadsheet" on the lower right side of the home page. BTW let's not get carried away with this one. Let's keep this reasonable. I'm not going to spend hours sending out 6 months worth of daily updates.
In bull markets you get abrupt nasty sell offs. We had one in Mar. and Aug. as an example. On the flip side in bear markets you get violent rallies when the market gets too oversold. We had several of those kind of rallies during the bursting of the Nasdaq bubble. The object is to figure out when we should be looking for one of these powerful rallies. In the S&P that level was 20% below the 200 DMA. Once that level was reached it was a good idea to cover shorts and wait for the inevitable rally before selling again. Well since I'm heavily invested in PM and they're influenced by the action in the dollar I want to know when I should be looking for a powerful rally in the buck. So far during this bear market that level has been around 8.5-10% below the 200 DMA. At the moment the dollar is about 5% below the 200 DMA. That would suggest that the dollar has a ways to go yet before we should look for a powerful rally. My guess earlier this month using other bear markets as an example was that the dollar could possibly sink to the 72-75 area in this second leg down. That should just about give us that 8-10% below the 200 DMA that I'm looking for before I want to sell any of my gold or silver positions.
Today seemed like a very bad day didn't it? Many of the bears are again calling for the end of the world. The truth is however that no trendlines were broken today. That's not to say they won't be broken tomorrow or the next day but as of today nothing serious has happened. Also take a look at the summation index. Notice how almost all declines are preceded by a divergence in the index. At the moment there is no divergence as a matter of fact the SI was up today. We may get a little short term weakness, but as of today it hardly looks like we saw the beginings of a bear market yet.
I got a request for a longer term chart of the gold/silver ratio. Ask and ye shall receive...hmmm I think I'll ask for silver to rise to $200 within the next 5 years :)
Notice the ratio has been erratically declining since 91. I tried to find a much longer chart, something in the 500 year range but wasn't able to locate it. The longer term chart shows the normal 15 to 1 ratio much better than this rather short chart. If anyone has a link to the longer chart maybe they could post a link.
We all like to buy when something is on sale right? The common sense answer is of course we do. If you go to the store to buy a pair of jeans and one store is having a sale, half off, I think it's safe to say you're going to make your purchase at the store having the sale. The problem is that when it comes to investing common sense gets tossed right out the window. When investing we are drawn to the most expensive "jeans". Hell if they raise the price overnight on us that just makes us want those "jeans" even more. Take a look at those first two charts oil & copper. Pretty representative of what's been going on in energy and base metals during this bull market. Both are showing gains in the 700% range. Now take a look at Gold. A measly 200%. How about silver 250%. Copper and oil look much more appealing don't they?
Of course that doesn't make any sense.
We're looking at two commodities that are on sale and not at half price but more like 1/3 price. Now let's take a little closer look at silver because at first glance it looks like silver is slightly more expensive than gold. The problem is that sometimes looks can be deceiving. The historic ratio of gold to silver is roughly 15 to 1. That means 1 oz. of gold should only buy 15 oz. of silver. So what does 1 oz. of gold buy at the moment you ask? 20 oz. of silver? 30 oz. of silver? 30 oz. would be twice what the historic norm is which would suggest that silver should be trading at $27.00 not $13.50. However 1 0z. of gold will buy a little more than 30 oz. of silver. How about 55 oz. of silver! At the moment gold will buy almost 4 times as much silver as it historically has throughout history. That means with gold at $750 an oz. silver should be priced somewhere around $45-$55. That would suggest this pair of "jeans" is on sale at 50-75% off. Personally I do love a good bargain and if the market is stupid enough to give me that kind of bargain I have no qualms about taking advantage of it :)
It seems that most investors think that China is in a bubble and it's ready to pop soon. Maybe it is and then again maybe it's not. First off notice from Mid 01 till 05 the Chinese market went through a devastating bear market . The SSEC lost more than half it's value. From that point the market has blasted off to a little over 400% gain. Impressive to say the least. But not all that unusual. Many secular bull markets can tack on 2000% before they're done. Look at the Nasdaq from 1980 to 2000. It gained 2000%. Granted the Chinese market has made those gains rather rapidly. I frequently hear about Chinese public piling into the markets as a sign of the end. However it usually takes about a year and a half of this kind of public participation before the market tops. Keep in mind the total population of China. The number of retail investors is still rather small compared to that huge population. I think I would hold out the possibility that China is exploding economically and there may be considerable upside yet before the inevitable correction comes. Of course it will come. When it does it's going to be one heck of a buying opportunity.
I'm starting to hear much ado about how there is too much bullish sentiment. This may or may not be true. At the end of a long bull market everybody is going to be bullish. The markets will have conditioned us to be bullish. Buying the dips will have been the motusoperandi for years and human nature being what it is we will assume that strategy will now work into infinity. The thing is at the end of a huge bull market contrary opinion won't work. Everybody will be piling in. Occasionally a few will get scared and sell only to see the market rocket upward. They will then be forced to chase as they can't stand to miss out on any gains. The market will just keep rising no matter how lopsided the sentiment gets. Near as I can figure when we start to see this happen. When the public starts to catch on we've got about a year to a year and a half for it to suck in every last one of the sheep. During this time it's best to ignore all the contrary opinion polls. They're just not going to work as the markets get lost in an orgy of speculation and euphoria. Are we starting to enter this phase of the bull? I don't know but I do trust that the smart money is going to know when the end is coming and get me off the train in time. Just like they did in 2000.
It now appears that the transports are ready to breakout of the triangle on the flat side as tech rule #6 (Triangles of either slope may mean either accumulation or distribution depending on other considerations although triangles are usually broken on the flat side) would suggest is the greater possibility. While the transports haven't broken below the Aug. 16th lows they have been lagging. A break below the Aug. 16th low would have been a Dow Theory nonconfirmation and a possible warning sign. It is now starting to appear that possibility is becoming more and more remote.
I checked recent history to see how many times the markets went through a 10% correction, rallied back to test the highs and then fell into another 10% or worse correction. This is the only one I could find in the last 27 years. Needless to say the odds are not good for the markets making a double top and then dropping below the Aug. lows.
I've posted this before but it's probably worth repeating. Final legs up in bull markets average 34% trough to peak in roughly 6 months. I've also noted that once the public starts to pile into an asset you can look for a parabolic move that lasts roughly 1 to 1 1/2 years. The Nasdaq bubble fit that criteria pretty closely. It lasted almost 1 1/2 years exactly. The real estate boom also lasted about a year and a half once the public caught on to a "sure thing". Notwithstanding last weeks COT, which may have been an aberration, the commercials are and have been at historic long positions. If we are entering this kind of period and you start hearing your neighbor and coworkers brag about how much they are making in the market keep in mind that at this stage of the game this is not a contrary signal. Far from it this means it is the time to be greedy as hell for about a year. Once that year is done then get rid of that greed at all costs and get the hell out.
I'm going to show you COT sell/short signals in the gold market for the duration of this secular bull. Take note here as this is important. The commercials are much better at spotting value than they are timing tops. I've got news for you it's pretty much the same in every futures contract including the S&P's. Spotting tops is virtually impossible and the commercial traders aren't really any better at it than you and me. When I get a short signal I'm very hesitant about shorting and if I do it is in very small amounts. It is much safer to just go to cash and wait for the next long signal. We've got a short signal in gold right now but as we can see the history hasn't been great for calling tops. Even if we do get a pullback it's very unlikely to amount to much or last very long. So I won't be shorting or selling any of my PM. I may take a little off the table on my PM stocks because there is some pretty strong odds of some kind of pullback this month but I would never think of selling any of my physical gold or silver which is where most of my capital is anyway.
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T1. A move followed by a sideways range often precedes another move of almost equal extent in the same direction as the original move. Generally, when the second move from the sideways range has run its course, a counter move approaching the sideways range may be expected. T2. Reversal or resistance to a move is likely to be encountered: - 0n reaching levels at which in the past, the commodity has fluctuated for a considerable length of time within a narrow range - On approaching highs or lows T3. Watch for good buying or selling opportunities when trend lines are approached, especially on medium or dull volume. Be sure such a line has not been hugged or hit too frequently. T4. Watch for "crawling along" or repeated bumping of minor or major trend lines and prepare to see such trend lines broken. T5. Breaking of minor trend lines counter to the major trend gives most other important position taking signals. Positions can be taken or reversed on stop at such places. T6. Triangles of ether slope may mean either accumulation or distribution depending on other considerations although triangles are usually broken on the flat side. T7. Watch for volume climax, especially after a long move. T8. Don't count on gaps being closed unless you can distinguish between breakaway gaps, normal gaps and exhaustion gaps. T9. During a move, take or increase positions in the direction of the move at the market the morning following any one-day reversal, however slight the reversal may be, especially if volume declines on the reversal.
General Trading rules
G1. Beware of acting immediately on a widespread public opinion. Even if correct, it will usually delay the move. G2. From a period of dullness and inactivity, watch for and prepare to follow a move in the direction in which volume increases. G3. Limit losses and ride profits, irrespective of all other rules. G4. Light commitments are advisable when market position is not certain. Clearly defined moves are signaled frequently enough to make life interesting and concentration on these moves will prevent unprofitable whip-sawing. G5. Seldom take a position in the direction of an immediately preceding three-day move. Wait for a one-day reversal. G6. Judicious use of stop orders is a valuable aid to profitable trading. Stops may be used to protect profits, to limit losses, and from certain formations such as triangular foci to take positions. Stop orders are apt to be more valuable and less treacherous if used in proper relation the the chart formation. G7. In a market in which upswings are likely to equal or exceed downswings, heavier position should be taken for the upswings for percentage reasons - a decline from 50 to 25 will net only 50% profit, whereas an advance from 25 to 50 will net 100% G8. In taking a position, price orders are allowable. In closing a position, use market orders." G9. Buy strong-acting, strong-background commodities and sell weak ones, subject to all other rules. G10. Moves in which rails lead or participate strongly are usually more worth following than moves in which rails lag. G11. A study of the capitalization of a company, the degree of activity of an issue, and whether an issue is a lethargic truck horse or a spirited race horse is fully as important as a study of statistical reports.
Investing in the financial markets can involve considerable risk. Past performance is not necessarily an indication of future performance. The information included in The Smart Money Tracker and The SMT subscribers daily updates is prepared for educational purposes and is not a solicitation, or an offer to buy or sell any security or use any particular system. Information is based on historical research using data believed to be reliable, but there is no guarantee as to its accuracy. G.D.S L.L.C., nor Gary Savage, do not represent themselves as acting in the position of an investment adviser or investment manager for funds that are not under their direct control and fiduciary responsibility. GDS L.L.C., Gary Savage, will not provide you with personally tailored advice concerning the nature, potential, value or suitability of any particular security, portfolio or securities, transaction, investment strategy or other matter. From time to time, GDS L.L.C., Gary Savage, may hold positions in securities mentioned, but are under no obligation to hold such positions.